Home purchase loans are something almost every person requires in order to buy homes. Unless you are exceptionally wealthy and have the full home purchase amount socked away under your mattress, you will have to obtain a mortgage for buying homes. The first thing is to ensure your credit report is accurate and shows a good credit worthiness (see the section on home buying credit preparation). Collect your documentation and paperwork; bank statements, tax returns, paystubs, and of course keep your cash for the downpayment ready. Get a real estate attorney, having a lawyer is an absolute must in todays crazy world. You should also get a homeowner insurance quote for the approximate value of the home that you are budgeting for. If you do not, the bank will force you to use their homeowner insurance carrier, which may not give you a good price or any benefits. You can underwrite the insurance policy when you finalize the contract on your new home (it is required before getting a mortgage).

Start comparing home (means a house, or an apartment unit in a building) purchase loan offers from as many banks and lenders as possible. Some lenders may require a formal application to be submitted, at which time they will pull your credit report to evaluate your credit rating. Due to the way credit scores work, you should ensure that all such mortgage applications be made within a 30 day timeframe. Every credit check appears on your credit history, and it actually lowers your credit score (lenders think you are in financial trouble). Mortgage and home purchase loan credit checks within 30 days are combined into one single credit check on your credit report - so you are not penalized for being smart and shopping for the best rate. If you have a banking relationship with a large bank that also does mortgages, you may be able to get a better (or preferred) rate from them, since they are already making money from you. Some Internet banks may offer very low rates, since they have no overhead expenses like a traditional brick and mortar bank.

There are two types of standard mortgages available for home buying:

• Fixed Rate Mortgage
• Adustable Rate Mortgage (ARM)

The Fixed Rate Mortgage guarantees the interest rate you are promised for the entire term of the home buying loan (provided you make timely payments and meet the requirements stated in the agreement). The Adjustable Rate Mortgage is, well, adjustable. It changes the rate periodically depending on the prevailing interest rate. If you obtain a fixed rate home purchase loan when interest rates are low, you will "lock in" that low interest rate for the life of the mortgage (usually 15 or 30 years, but could be any length). Even when interest rates rise you can sit back and chuckle, watching the bank manager breaks out in a sweat. On the other hand, if interest rates drop after you get a fixed rate mortgage, you will continue to pay the higher interest rate. Note however, you may be able to refinance the loan to take advantage of the lower interest rate.

Adjustable Rate Mortgages interest rates change often and follow the market interest rate. If you get an ARM home purchase loan when interest rates are high, when the rates drop you will benefit from the lower interest rate. However, if you take an ARM loan when interest rates are low, you will pay a higher interest rate if the market interest rate rises. ARM loans may have partial "locked" rates, in that they stay fixed (or have a ceiling) for a set period of time before they start following the market interest rates.

Regardless of which kind of home purchase loan you get, a Fixed Rate or Adjustable Rate Mortgage, you must be sure to read and understand all the fine print. And always get your lawyer's opinion on the agreement before signing anything. Predatory lenders will try to force you to sign agreements with bogus deadlines "this rate expires at midnight so you must sign it now". Don't get rushed into signing anything. Always ensure that you have an out-clause, which is the refinance option, without any penalties. Should you get a better offer in the future, you want to be able to pay off the loan and switch to another lender without any penalties. Also ensure that there are no early payment penalties, some lenders will charge you a fee for extra payments or early payments. Extra payment policies should also be clear and in writing. You want to make extra payments (read the reason in the next paragraph) each month, this amount should be applied to reducing your PRINCIPAL. Some predatory lenders simply apply it to the LAST payment (at the end of the mortgage term, say 29th year and 11th month) - this way they get to eat your interest on the full loan amount for the entire term. Any fees and charges must be clearly spelled out - normally mortgage companies maintain an "escrow" account on your behalf from which they pay real estate taxes and insurance. There is usually NO FEE for this, in fact they owe you interest on the money that you keep in escrow. You have every right to make tax and insurance payment by yourself, should the mortgage company make ridiculous fee demands for it.

Here is a little known mortgage secret (that no lender will tell you) - if you make extra payments each month towards your principal, you will pay off the home purchase loan in less time (possibly half the time if you match the principal amount, that is, a 30 year mortgage can be paid off in 15 years). Its a simple enough trick, and the principal amount of a typical mortgage payment is less than a third of the total monthly amount. Be sure to discuss this with your lawyer, and ensure that the mortgage lender does not penalize you for making extra principal payments. Another trick to reduce your interest rate is to buy "points" when you initially get the mortgage. A Point is simply a prepaid amount of interest - so you effectively give the lender some money up front to reduce the interest rate by a teensy bit. Points are fully tax deductible (at the time of this writing) as mortgage interest payments, be sure to do the math and ensure you are getting a good benefit by paying points.

Just so you know, almost every prime mortgage (that is, if your credit worthiness is worthy) is resold to either of the quasi-government agencies call Fannie Mae or Freddie Mac. Your bank will continue to service your loan, that is, receive payments from you and handle the escrow/taxes/insurance - but they are simply repaying the loan they took from Fannie Mae/Freddie Mac to offset the money they lent you. The banks are happy, they are getting their money back right away, and should you (or him or her) default - the loss is borne by the buying agency. The banks also get a discount on the loan rate, so they make money coming and going, but hey - thats capitalism.

Once you have decided which bank or lender you will get your home purchase loan from, you can get a "pre-approval" from them stating the maximum amount that they are willing to lend you. Note that a pre-approval requires complete credit report processing and a signed agreement with the bank or lender. A "pre-screen" is different, it simply states that (or this, or whatever) the lender is willing to consider your request for a loan, and it appears that you qualify based on the unverified information you provided them. A pre-approval letter is always better since all the processing has already been completed (for your financial/credit history), all the bank has to do is write the check once you close on the real estate deal. When you go shopping for a new home, having a pre-approval letter is much stronger when you make an offer - the seller knows that you have the money - and will likely choose your offer instead of another without a pre-approval (or with only a pre-screen), since they can get your check faster than from the other buyer.